4400

IMPLIED TERMS AND INTERPRETATION IN

CONTRACT LAW
George M. Cohen
Edward F. Howrey Research Professor of Law, University of Virginia
School of Law
© Copyright 1999 George M. Cohen

Abstract

This chapter examines the economic arguments for textualism and

contextualism, the two primary methodologies used by courts to determine the
intentions of contracting parties with respect to their performance obligations.
Textualism, which is rooted in the idea of complete contracting, calls for a
more restrictive approach to implied terms and interpretation than
contextualism, which is rooted in the idea of incomplete contracts. The primary
conclusions are that, as in other areas of contract law, the choice between the
two interpretive methodologies depends on the transaction costs of drafting, the
relative likelihood of court error, and the risks of opportunistic behavior.
Neither methodology dominates so much that it should be uniformly employed,
which is consistent with how courts actually behave.
JEL classification: K12
Keywords: Contracts, Completeness, Interpretation, Implied Terms,
Opportunism, Contextualism, Textualism

1. Introduction

Questions of how courts interpret, and should interpret, contract terms and
when courts imply, and should imply, terms to which the contracting parties
have not explicitly agreed, loom large in contract disputes and in the legal
literature on contract law. Law and economics scholars, however, have written
far more extensively on other topics in contract law than on these questions.
For example, Judge Posner’s treatise has no section specifically discussing
interpretation or implied terms, and discusses contractual good faith in only
two paragraphs (Richard Posner, 1998, pp. 103, 126). Other leading textbooks
also have no discussion of interpretation or implied terms. One possible
explanation for this discrepancy is that there is little need for research
specifically on interpretation and implied terms because much of the economic
analysis of other areas of contract law carries over straightforwardly to these

78
4400 Implied Terms and Interpretation in Contract Law 79

questions. An alternative explanation is that economic analysis has less to say

about interpretation methods than it does about other questions in contract law.
This article, which will summarize and expand on the literature that does exist,
aims to demonstrate that economic analysis has a good deal to say about
interpretation questions, but the issues are complex and there are many fruitful
avenues for further research.
The argument that there is no real need for a separate economic analysis of
interpretation and implied terms stems from the fact that the delineation of the
topic is based on legal rather than economic considerations. In contract law,
interpretation usually refers to problems arising from express contract terms
that are reasonably susceptible of more than one meaning. Implied terms are
those that are added to, or place limits on, expressly stated terms. The two are
closely related, yet not identical. For example, if a contract contains a ‘best
efforts’ clause, determining what that clause requires is a question of
interpretation; if the contract contains no such clause, courts may have to
decide whether to imply a best efforts obligation, and if they do, they have to
determine the content of that obligation. On the other hand, some questions of
interpretation do not involve questions of implication, for example, a dispute
over the meaning of the word ‘chicken’.
In some sense, all contract disputes involve questions of interpretation and
implied terms. For example, force majeure clauses - usually discussed in the
context of the (implied) impossibility defense - present questions of
interpretation, and most contract formation, excuse, and damage rules are
‘implied terms’. But contract law has generally used the labels ‘interpretation’
and ‘implied terms’ more narrowly, to refer to questions of contract
performance, rather than questions of formation, excuse, defense, or remedy.
That is, the legal issue addressed by these doctrines is whether one or more
parties have performed as the contract requires, or have breached. Thus, I will
assume for purposes of this discussion that the parties have made an
enforceable contract, there are no changed circumstances or ‘mistakes’
sufficient to give rise to an excuse claim, the applicable remedies in the event
of breach are accepted, and there are no third-party effects. How do courts
decide - and how should they decide - what the performance obligations are and
whether the parties have met them?

2. Complete or Incomplete Contracts

Economic analyses of contract law have tended to start with the idealized
concept of a ‘complete’ contract, though this term has perhaps engendered
more confusion than clarity. Traditionally, a complete contract has referred to
one that provides a complete description of a set of possible contingencies and
80 Implied Terms and Interpretation in Contract Law 4400

explicit contract terms dictating a performance response for each of these

contingencies (Al-Najjar, 1995; Hart and Moore, 1988). Contingencies include
changes in ‘exogenous’ economic variables, such as a production cost increase.
But they also include ‘endogenous’ behavioral responses, such as falsely
claiming a cost increase or seeking refuge from a now-disadvantageous bargain
behind a contract term intended to serve a different purpose. Economic analyses
generally conclude that if a contract is complete, there is no beneficial role for
a court other than to enforce the contract according to its terms; that is,
incompleteness is a necessary, though not sufficient, condition for an active
court role in interpretation and implied terms.
But because no real-world contracts are fully complete in this sense, the
concept of completeness does not get us very far. The concept can be rescued
in one of three ways. One way is to view completeness as a useful benchmark,
similar to perfect competition. Just as some markets are close enough to being
perfectly competitive that the perfect competition model is a useful predictor,
so some contracts may be complete enough that no reasonable interpretation or
implied term questions arise. The law refers to these contracts as ‘integrated’.
But tying completeness to integration simply reduces to a tautology the
statement that a complete contract obviates the need for interpretation or
implied terms. The question is how do courts know when a contract is complete
in this sense.
One way courts can know a contract is complete is if the parties tell them.
Thus, a second way to rescue completeness is to recognize that contracting
parties can make a contract complete by using general ‘catchall’ clauses that
state what happens in all unspecified states of the world (Hermalin and Katz,
1993, p. 236; Hadfield, 1994, p. 160, n.5). For example, a catchall clause might
state: ‘The price term will be x, and will apply regardless of any change in
circumstances or conduct by either party’. Alternatively, the parties could state
their general desire not to have courts interpret or imply terms. But although
contracting parties often use general clauses such as merger clauses, which
direct a court to apply a particular interpretive methodology (that is, do not look
beyond the writing), they do not seem to use catchall clauses that are broad
enough to make contracts complete. Of course, clauses that are not stated as
catchalls could be - and sometimes are - interpreted that way, but, to lawyers
at least, if not economists, that act of interpretation then requires justification
(Hadfield, 1994, p. 160). Even clauses that are stated as catchalls might require
interpretation (Charny, 1991). Moreover, contracting parties often use
contracting clauses that are the exact opposites of completeness catchalls:
general clauses such as ‘good faith’ or ‘best efforts’ clauses signal contracting
incompleteness, as opposed to completeness (Hadfield, 1994, p. 163).
A third way to rescue completeness, more common in formal economic
modeling, is to tie the concept of completeness to the efficient use of available
4400 Implied Terms and Interpretation in Contract Law 81

information. A complete contract is one that makes full use of the private
information available to the contracting parties (Hermalin and Katz, 1993, p.
235). The point of this definition is to make clear that parties can write efficient
contracts that do not expressly specify the response to every contingency, yet
obviate the need for court intervention (Hermalin and Katz, 1993, p. 242). But
the fact that parties may in a simplified model be able to write ‘economically
complete’ contracts does not answer the question of whether in a given legal
dispute they have in fact written one. And the ability of private parties to write
economically complete contracts in the real world is unclear. We do not seem
to see, for example, contracts of the type described by Hermalin and Katz, in
which the contract leaves the quantity and price unspecified, then after some
period one party names the price and the other names the quantity. Perhaps the
costs of writing these contracts (including the costs of strategic circumvention)
are too high. Perhaps the current enforcement regime interferes with, or
discourages, the parties, writing of such contracts, though this seems unlikely.
It seems fair to say, however, that many if not most contracts are
incomplete, or at least the question of their completeness is itself a legitimate
question for judicial interpretation. The incompleteness may be intended by
both parties, which creates so-called ‘relational contracts’ (Goetz and Scott,
1981), or ‘fiduciary contracts’ (Easterbrook and Fischel, 1983, p. 438). It may
result from unintended ‘formulation error’ which occurs when, as a result of
defective contractual instructions, the occurrence of some contingency produces
surprising consequences (Goetz and Scott, 1985, p. 267, n. 11). It may result
from strategic withholding of information by one party. Or incompleteness may
result from court error. Whether a contract that the parties think is complete,
but is misinterpreted by a court, should in fact be viewed as an ‘incomplete’
contract depends on how completeness is defined. If completeness is defined
with reference to the obviation of interpretive questions, the definition must
assume that completeness means that a contract’s terms are ‘unambiguous’,
that is, the contract terms represent a confluence of the parties’ intentions and
the court’s ability to interpret those intentions correctly (unless the contract is
somehow self-enforcing).
Incomplete contracts may be efficient contracts, even if the incompleteness
is unintended. The costs of contractual completeness would often exceed the
benefits, just as the costs of reducing crime or pollution or accidents to zero
would exceed the benefits. Incomplete contracts will tend to be efficient when
contracts are relatively complex, that is, when there are a large number of
low-probability contingencies that could affect the value of contractual
performance, and the efficient responses to those contingencies vary greatly and
so cannot easily be specified in advance (Hadfield, 1994, p. 165, n.15). In these
cases the transaction costs of negotiating, drafting, monitoring, and enforcing
a complete contract are high.
82 Implied Terms and Interpretation in Contract Law 4400

More generally, in the language of institutional economics, a complete

contract is only one form of ‘governance mechanism’ for guiding the behavior
of contracting parties (Al-Najjar, 1995). Alternative governance mechanisms
include the courts and extralegal enforcement, such as social sanctions and
reputation. In this approach, incomplete contracts will tend to be efficient
whenever governance mechanisms superior to a detailed contract exist, that is,
whenever the opportunity costs of completeness are high. In fact, contrary to
the usual economic approach, the actual historical development of contracts is
probably best described as starting as incomplete as possible, then becoming
more complete and formal as governance mechanisms other than the written
contract proved to be inadequate.
The question of contract interpretation and implied terms is really a
question of when the courts are a superior governance mechanism. Courts may
be able through interpretation and implied terms to provide necessary flexibility
- efficient adjustments to contingencies - that an incomplete contract otherwise
lacks. Courts may also be superior to nonlegal institutions such as reputation
because reputation effects may be weak due to such things as cognitive
dissonance, optimism about the ability of a party with a poor reputation to
change, the difficulty of knowing when a contracting partner has behaved
badly, and the last period problem. In general, the role for courts in interpreting
contracts and implying terms increases as contracts become more efficiently
incomplete.

3. Incomplete Contracts and Contractual Intent

Now suppose the contract is incomplete, as are most contracts that are the
subject of litigation. What should a court do? The economists’ (and courts’)
usual assumption is that courts should follow the intentions of the parties, but
to admit incompleteness is to admit that the intention of the parties is
uncertain, or at least disputed (some would say nonexistent). The next best
solution is to adopt the term - or interpretive methodology - the parties would
have chosen had they bargained over the matter, that is, presumed or
hypothetical intent. But how is presumed intent determined?
There are two general possibilities on which economic analyses have
focused (Hadfield, 1992, 1994, p. 161). First, courts might presume that
complete contracting is both feasible and desirable. This presumption has both
a positive and a negative component. On the positive side, the express terms of
the contract are presumed to be the best approximations of the parties’
intentions and deemed to create a complete contract. This strategy is usually
referred to as textualism. On the negative side, if parties fail to write a complete
contract, the incompleteness is presumed to be inefficient, whether unintended
4400 Implied Terms and Interpretation in Contract Law 83

or strategic, and the court’s approach should be to deter this behavior and
encourage complete contracting. This strategy is a variant of what has come to
be known as penalty defaults (Ayres and Gertner, 1989), which is itself a
variant of an old idea in the Austrian School of economics that individuals
should bear the consequences of their actions so that they become more rational
over time (for example, Wonnell, 1986, p. 520).
The second general approach involves a presumption that contractual
incompleteness is unavoidable and/or desirable, due to limitations of money,
time, comprehension and foresight (Hadfield, 1992, p. 259). The courts then
fill in the gaps by presuming the parties intended to contract with reference to
some standard external to the written contract. Courts might presume parties
contracted with reference to their current (course of performance) or prior
(course of dealing) conduct, or to the conduct and understandings of similarly
situated parties (trade usage or custom or business mores). Strategies that focus
on these presumptions, which are featured predominantly in the Uniform
Commercial Code, are usually referred to as contextualist. Alternatively, courts
might presume the parties contracted with the expectation that courts would fill
in any gaps with a joint maximizing term that would have been written by
rational parties under conditions of low transaction costs (Goetz and Scott,
1981). In practice, the joint maximization strategy will often dissolve into
contextualism, as courts lack the data necessary to do pure joint maximization.
It is important to remember that all of these strategies involve presumptions.
It is all too easy for courts or proponents of a particular strategy to criticize the
alternatives as failing to hew closely enough to the parties’ intentions, when in
fact the parties’ intentions in incomplete contracts are at least uncertain, and
the question is which strategy is more likely to be successful at approximating
these intentions. For example, suppose a buyer rejects goods delivered late after
the market price drops below the contract price. A court might be called upon
to decide whether to imply a good faith limitation on the buyer’s ability to
reject. A textualist might argue no on the ground that such an implication
would be contrary to the parties’ intentions as expressed in the time of delivery
term. But the parties’ intentions - whether actual or hypothetical - may well be
that a good faith obligation should be implied rather than that the time of
delivery term should be interpreted as absolute. A proposition that textualism,
contextualism, penalty defaults, or joint maximization best represents the
parties’ intentions needs to be defended. Economic analysis can help to identify
the conditions under which the various interpretive strategies are more likely
to approximate the parties’ intentions, and whether courts are better off
pursuing a pure interpretive strategy or a mixed one.
84 Implied Terms and Interpretation in Contract Law 4400

4. Default versus Mandatory Rules and Contractual Intent

The recognition of incomplete contracting and the uncertainty of contractual

intent renders problematic another distinction that has played an important role
in economic discussions of contracts, namely default rules versus mandatory
rules. The term ‘default rule’ refers to several different characteristics: (1) if the
parties specify some contract term, the court will enforce that term; (2) if the
parties fail to specify some contract term, the court will fill in the gap and
supply one; and (3) if the parties fail to specify some contract term but do not
want the court to fill in the gap, the court will honor that intent (that is, the
gap-filling rule itself is a default). UCC § 2-305 on open price terms is a good
example of a rule that satisfies all three characteristics. Default rules are usually
contrasted with mandatory rules, which term can also refer to three
characteristics. Mandatory rules can refer to situations in which the court
knowingly: (1) imposes a term that contradicts a term the parties specified; (2)
refuses to fill in a gap that the parties left when the parties wanted the court to
fill the gap; and (3) fills in a gap that the parties did not want the court to fill
in.
When economists refer to mandatory terms, they usually mean the first
sense, that is the court rejecting a term the parties specified. An example would
be a liquidated damage clause deemed to be a penalty, or a term deemed to be
unconscionable. The usual critique of mandatory terms is that because they
disregard the intentions of the parties, the parties who prefer these terms will
be made worse off. For example, if a court imposes a stronger performance
obligation on an obligor than the parties intended, then future obligors will
extract a higher price, which is more than the obligee wanted to pay (else he
would have paid for it originally) (for example, Easterbrook and Fischel, 1993,
p. 431). This critique makes sense if contracts are assumed to be complete.
But once we allow for the possibility of efficiently incomplete contracts and
unclear intent, it becomes much more difficult to distinguish mandatory rules
from default rules. Take, for example, the implied duty of good faith, or the
duty of loyalty in fiduciary contracts. Are these defaults or mandatory rules?
That depends on how well one thinks the duty of good faith tracks contractual
intent. If one believes that parties may write incomplete contracts for which
they expect courts to fill in the gaps, the duty of good faith or the duty of loyalty
might easily be viewed as a default. If the parties want a particular obligation
that conflicts with what courts ordinarily view as good faith or loyalty, and they
specify that obligation, courts will generally enforce it. This is the view
espoused by Easterbrook and Fischel (1993). On the other hand, if one believes
that courts use the duty of good faith or the duty of loyalty to fill in gaps that
the parties did not want to be filled, or to reject obligations the parties thought
they had fully specified, then the duty of good faith looks more like a
mandatory term. UCC § 1-102(3) evidences this ambivalence about the good
faith obligation.
4400 Implied Terms and Interpretation in Contract Law 85

The mirror image issue is presented by the doctrine of certainty, which says
that courts may sometimes decline to fill gaps the parties have left in contracts.
The doctrine could be viewed as a default if one is willing to presume that when
the parties have left ‘too many’ gaps for the courts to fill, they do not have
contractual intent, and if they do have such intent they will override the default
by filling in the terms themselves. Alternatively, the doctrine could be viewed
as a mandatory rule if one assumes that the courts use it to refuse to fill in gaps
when the parties wanted them to.
The point is that the labels ‘default’ and ‘mandatory’ are conclusions that
can mask the assumptions being made about contractual completeness and
intent, and so do not by themselves resolve the questions of implied terms and
interpretation.

5. Unintended or Strategic Incompleteness: Encouraging Better

Contracting

If the contracting parties wanted to write a complete contract but failed in some
way, the failure can be viewed as analogous to an accident in tort law. The
accident may occur because one or both parties failed to take cost-effective
‘contract-based precautions’ (Cohen, 1992, p. 949). Alternatively, one of the
parties might make a contract incomplete to serve his strategic bargaining
interests by withholding information. In either case, courts can use the
doctrines of interpretation and implied terms to encourage the parties to
‘facilitate improvements in contractual formulation’ (Goetz and Scott, 1985,
p. 264). One way to encourage better contracting is to encourage more complete
contracts, that is, the greater use of express written terms. If a court is willing
to ‘insure’ parties through flexible interpretations and implied terms it creates
a classic moral hazard problem: the parties have less incentive to write good
contracts themselves, for example contracts with more precise language.
Doctrines such as the parol evidence rule encourage parties to write more
complete contracts by giving more weight to the written document and limiting
the extrinsic evidence courts can consider. Strict application of these doctrines
may thereby increase the accuracy of contract enforcement (reduce contractual
accidents) by reducing the interpretive risks of relying on extrinsic evidence
(Eric Posner, 1998, p. 546).
As in tort law, the goal of encouraging better contracting makes economic
sense if the precautions are cost-effective. That will be the case if one or both
of the contracting parties face low ex ante transaction costs of drafting and
monitoring express contract terms that successfully specify performance
obligations in response to different regret contingencies, as well as if the
expected losses from interpretive accidents are high (Eric Posner, 1998, pp.
543-547). Moreover, courts must be able to identify accurately situations in
86 Implied Terms and Interpretation in Contract Law 4400

which precautions are cost-effective. Usually, the best courts can do is to use
proxies to make reasonable comparative judgments. In particular, in
investigating precautions, courts can compare the capabilities of contracting
parties and they can compare the contract in dispute to other litigated contracts
(Eric Posner, 1998, pp. 553-561).
In comparing contracting parties, courts might conclude that one
contracting party is the ‘least cost avoider’, or in this case the ‘cheaper contract
drafter’, namely the party in a better position to clarify a term or to identify
what should happen in the event of some contingency. This approach explains
such interpretive rules such as contra proferentum, which encourage the party
in the better position to draft a more complete contract to do so. Similarly, if
one of the parties is a repeat contractor or is assisted by legal counsel and the
other is not (as in many consumer contracts), imposing liability on the repeat
and represented contractor in cases of contractual ambiguity or incompleteness
will encourage that party to improve the terms of its contracts. In addition, if
one of the parties has an informational advantage, imposing liability on that
party could encourage similarly situated parties in the future to reveal the
information. But there may not always be a ‘cheaper contract drafter’, or if
there is, the necessary precautions might not be cost-effective. Such might be
the case, for example, with a party who commits a ‘scrivener’s error’ in a
written contract, especially if the error is one that the other party could
reasonably have noticed.
The alternative of comparing similar contracts rather than contracting
parties can also yield some useful guidelines. For example, one piece of
relevant evidence about ex ante transaction costs would be how common a
particular term is in similar contracts. The more common a term, the more
likely the costs of contracting over that term are low. Courts can then presume
that most parties who wanted such a term would have contracted expressly for
it and those who have not can be deemed negligent or strategic. Alternatively,
one might argue that transaction costs are low for relatively ‘simple’ contracts
or for ‘crucial’ terms. But even if courts are able through comparative analysis
to identify simple contracts or common or crucial terms, there is a further
difficulty: ease of contracting may not be a sufficient justification for imposing
liability.
The reason is that encouraging better contracting does not necessarily mean
encouraging greater contractual completeness; it may mean encouraging
greater contractual incompleteness through reliance on implied terms. Under
a majoritarian default approach to implied terms, courts would minimize
transaction costs by choosing the mix of express and implied terms that most
contracting parties would want. The majority of contracting parties might want
courts to use implied terms, especially in well-developed markets, because they
believe that will save on the costs of contracting, even if the transaction costs
of contracting are relatively low. Alternatively, the majority of contracting
parties might believe that relying solely on express terms - even those that
4400 Implied Terms and Interpretation in Contract Law 87

simply try to mimic implied terms - might be less reliable than relying on
well-established implied terms either in conjunction with or instead of express
terms; that is, they might fear court misinterpretation more than court
misimplication. The only contracting parties who should be encouraged to
contract more explicitly under this approach are those who have ‘idiosyncratic’
preferences. Thus, the fact that parties fail to contract expressly (or
unambiguously) for a given term - even a common or crucial one - may simply
be an expression of intent to be bound by the majoritarian understanding of that
obligation.
An example of the majoritarian default approach is the rule that contracting
parties ‘in the trade’ are bound by trade usages, even if they did not know about
them. This rule encourages the parties in a trade to develop such usages (which
are majoritarian understandings) and to familiarize themselves rapidly with
these usages, hence reducing the need for heavily lawyered documents (Warren,
1981). Thus, implied terms serve as a public good, a standard set of contract
terms that parties either accept or reject. The same majoritarian approach could
also apply to the interpretation of express terms. The ‘plain meaning rule’
could be viewed as a way of encouraging contracting parties to learn the
common (one might even say implied) meaning of words, thus reducing the
need for and costs of elaborate definition and explanation.
Of course, the majoritarian approach to encouraging better contracting itself
presents problems. For example, identifying the majoritarian default seems to
call for an empirical inquiry, which courts are often ill-equipped to make,
though to the extent that there is a recognized trade usage, or a course of
dealing or course of performance, this problem is mitigated. Verkerke (1995)
attempts to remedy this problem in the context of employment contracts by
surveying employers about the discharge terms contained in their employment
documents. He found that 52 percent of employers reported that their
employment documents specified an ‘at will’ provision (the prevailing default),
15 percent reported that their documents contain a ‘just cause’ provision, and
33 percent reported that they do not have documents that address the issue
explicitly (Verkerke, 1995, p. 867). He also found that larger firms and firms
from more ‘liberal’ jurisdictions are more likely to contract explicitly for the at
will rule. From these data, Verkerke concludes that the at will default is the
majoritarian default. A more cautious conclusion would be that a broadly
defined just cause provision is not a majoritarian default, but given the
limitations many states have put on the at will doctrine and the possibility of
unwritten (or written, but narrow) qualifications on the right to discharge,
whether the majoritarian default is the strong form of the at will doctrine
expressed in many employer documents or a more limited form is less clear.
An additional problem with the majoritarian default approach is the need
to determine when the parties have contracted around the default. Goetz and
Scott (1985) argue that it is often difficult for courts to tell whether parties are
88 Implied Terms and Interpretation in Contract Law 4400

using express terms to trump (opt out of) implied terms or merely to
supplement them. That is, it may be difficult for courts to tell in a particular
case whether the parties intended to incorporate implied terms by writing an
incomplete contract, or whether they intended the express terms they used to
create a complete contract; thus, the contractual ‘accident’ results from the
parties’ unintended failure to resolve the tension between the express terms and
implied terms. The more courts favor and encourage implied terms and
common usages, the more costly it becomes for the parties who want to contract
out of those terms to do so. As discussed above, ostensible default rules begin
to look more like mandatory rules. The courts’ choice of interpretive strategy,
therefore, may affect not only the parties’ incentives to contract more expressly,
but also their ability to contract around the implied default rule.
Goetz and Scott argue that the more likely it is that contracting parties will
be unhappy with the court’s implied terms and interpretations - the more
heterogeneous contracting parties are likely to be - the more inefficient an
expansive approach to implied terms and interpretation will be. In contrast,
where contracting parties are more likely to engage in homogeneous and
repetitive transactions - that is, where the transactional variance is low - the
more likely a contextual approach will be efficient because it will foster the
development of more standardized terms by trade groups, lawyers, and the
parties themselves. One could also justify the contextual approach in such cases
on the ground that in ‘conventional’ contracts, court error is likely to be low
(Eric Posner, 1998, pp. 553, 556). Implementing this notion is often more
difficult than stating it, however.
For example, Goetz and Scott suggest that in well-developed markets courts
should generally allow context evidence to supplement express terms, but
should generally not allow context evidence to override the plain meaning of
express terms (Goetz and Scott, 1985, pp. 313-315). Eric Posner has recently
criticized this argument on the ground that there is no theoretical justification
for having a flexible approach with respect to incompleteness (implied terms)
but a strict approach with respect to ambiguity (interpretation of express terms)
(Eric Posner, 1998, pp. 559-560). On the one hand, it should not matter
whether the parties use, for example, a best efforts clause or leave one out and
let the court imply it; if the courts consider extrinsic evidence in one case, they
should do so in the other. On the other hand, the ‘plain meaning’ of a best
efforts clause requires a kind of context evidence, namely the general
understanding of the clause. Thus, there may be no inconsistency in having a
flexible approach to incompleteness and a plain meaning approach to
ambiguity: both favor allowing a certain type of contextual evidence, namely
general contextual evidence. The problem arises when the contextual evidence
being considered is not general but specific to the contracting parties, such as
course of dealing, course of performance, or prior negotiations. Here a flexible
4400 Implied Terms and Interpretation in Contract Law 89

approach to incompleteness would allow the specific context evidence to trump

the general, but the plain meaning rule would have the general context
evidence trumping the specific. At this level of generality, Posner’s argument
seems correct. Although one could imagine cases in which a court might want
to use a flexible approach to incompleteness and a strict approach to ambiguity,
it is difficult to make any general statements about such cases; in fact, one
could just as easily imagine cases in which a strict approach to implied terms
and a flexible approach to ambiguity would be appropriate. Goetz and Scott’s
argument about the plain meaning rule perhaps should be read as limited to
express terms that are commonly understood as general trumping terms that
override implied terms, such as merger clauses, disclaimers, or clauses granting
one party broad discretion. If the parties go to the trouble of using such a
general trumping term, then arguably that should be a sufficient signal of their
idiosyncracy. But even this interpretation is unsatisfactory because, as with the
at will term discussed above, it may not be clear whether the parties simply
intended to use the trumping clause to reject an overly broad implied term or
whether they also meant it to convey the full measure of the parties’ obligations
to the exclusion of all extrinsic evidence.
The discussion in this section so far has assumed that ex ante transaction
costs are low. The higher the ex ante transaction costs of drafting and
monitoring become, the less likely it will be efficient for a court to adopt
restrictive rules of interpretation and implied terms that encourage parties to
contract more explicitly, because it will not be cost-effective for the parties to
do so. Reliance on the types of contextual evidence discussed above now
becomes relatively more cost-effective as the accuracy of the written contract
declines. If courts take too restrictive a view of interpretation and implied
terms, the development of cost-saving interpretive devices might be
discouraged in favor of more complete, but costlier, writings (Burton, 1980, p.
373). Alternatively, too few contracts might be formed ex ante, as the
promisor’s costs rise to cover an anticipated remedy that the promisee does not
value at this cost. And too much performance might occur ex post, as the
promisor performs even when the cost of doing so exceeds the value of
performance (Easterbrook and Fischel, 1993, p. 445).
Once again, stating the general principle may be easier than applying it.
Classic examples of high-transaction costs contracts are principal-agent
contracts usually referred to as ‘fiduciary’. These contracts typically involve
complex tasks for which the principal cannot easily measure the agent’s effort
or outcome, thus making express contracting difficult (Cooter and Freedman,
1991a, p. 1051; Easterbrook and Fischel, 1993, p. 426). Other examples
include contracts between unsophisticated parties or long-term contracts. Even
in high-transaction cost contracts, however, a more restrictive approach to
interpretation and implied terms might be appropriate if the contracting parties’
90 Implied Terms and Interpretation in Contract Law 4400

preferences with respect to certain obligations are likely to be idiosyncratic, or

equivalently if the relevant context evidence is less reliable (Eric Posner, 1998,
pp. 557-558). By the same token, the same concerns raised by high-transaction
cost contracts might exist even in ordinary sales contracts. For example, if a
contract allows for a 10 percent variation in the quantity for the (unstated)
purpose of avoiding liability over loss during transportation, a question might
arise whether the seller could take advantage of this provision to deliberately
increase or decrease the quantity as the market price drops or rises. Although
one could say that the buyer could contract to prevent such behavior by, say,
limiting the application of the quantity variation provision to losses suffered in
transit (Gillette, 1981, p. 655), it may be quite difficult to draft such a clause.
What should happen, for example, if both a market price change and damage
to the goods occur? What about damage to the goods before and after transit?
Is it always desirable to have the parties provide explicitly for all these
contingencies? The point is that a given contract may be viewed as
low-transaction cost for some purposes and high-transaction cost for others.

6. Deterring Opportunistic Behavior

Getting the mix of express and implied contracting terms right - that is,
encouraging the optimally complete written contract - is only one consideration
(and perhaps not the most important) that courts do or should face when
deciding questions of interpretation or implied terms. A second approach to the
question of how courts should interpret contracts and when they should imply
terms focuses not on encouraging efficient contracting, but on deterring
opportunistic contractual behavior (though obviously the two overlap).
Opportunism can be broadly defined as deliberate contractual conduct by one
party contrary to the other party’s reasonable expectations based on the parties’
agreement, contractual norms, or conventional morality (Cohen, 1992, p. 957).
Alternatively, opportunism is an attempted redistribution of an already
allocated contractual pie, that is a mere wealth transfer (Muris, 1981; compare
Burton, 1980, p. 378). For example, a contract may require B to paint A’s
portrait ‘to A’s satisfaction’ (Richard Posner, 1998, pp. 103-104). This
provision allows A to reject the portrait even if others like it if it does not suit
A’s taste. But if A rejects the portrait for reasons other than unhappiness with
the painting’s quality - say because A remarries a spouse who does not want
A’s portrait in the house - A acts opportunistically.
The problem of opportunistic behavior is perhaps the key justification for
court intervention in contracts. In general, ‘the threat of opportunism increases
transaction costs because potential opportunists and victims expend resources
perpetrating and protecting against opportunism’, which ‘do not help produce
4400 Implied Terms and Interpretation in Contract Law 91

a commodity or service that the contracting parties mutually value’ (Muris,

1981, p. 524). More specifically, opportunistic behavior makes complete
contracting extremely difficult. Even if contracting parties could anticipate all
of the possible changes in economic variables, they would have a much harder
time anticipating and protecting against opportunistic behavior by the other
party. At the extreme, the more one contracting party is willing to contemplate
the possible opportunistic behavior of his contracting partner, the less likely he
will be to want to contract with that partner at all. Some degree of trust is
necessary for contracting to occur. More important, many seemingly airtight
contract terms can seem awfully leaky once a clever lawyer and a highly
motivated client get through analyzing them. Just as cartel members can often
find ways to cheat on cartels involving the most standardized products, so
disappointed contractors can often find a way to act opportunistically in the
most standardized contracts. Because contracting parties cannot solve all
problems of opportunism on their own, courts can reduce transaction costs by
imposing liability on the ‘most likely opportunist’.
But there are difficulties with using courts to deter opportunism. In
particular, opportunism is often ‘subtle’, that is, difficult to detect or easily
masked as legitimate conduct (Muris, 1981, p. 525). Contract performance
disputes arise when one party becomes unhappy with the contract. This
unhappiness may stem from the occurrence of a risk that party had
contractually agreed to bear. However, the disappointed party might be able to
exploit some contract term to claim that the other party had breached or to
allow the contested behavior, even though the term was intended to handle
another situation. Alternatively, the disappointed party might be able to
exaggerate or misrepresent the extent of a contingency that might excuse his
performance, and so escape his contractual obligations.
The problem that subtle opportunism poses for courts is often surmountable.
In the fiduciary context, courts adopt, via the duty of loyalty, a strong
presumption of wrongful misappropriation by an agent when that agent has a
conflict of interest, engages in self-dealing, or withholds information from the
principal (Cooter and Freedman, 1991a, p. 1054). More broadly, opportunism
may be more possible whenever one party has a significant information
advantage over the other. In other contexts, courts can find ‘objectively
verifiable circumstances that act as surrogates for the existence of opportunism’
(Muris, 1981, p. 530). On the one hand, when the contract assigns a particular
risk to one of the parties, and that risk materializes, the court should be
skeptical of attempts by that party to escape his obligations via a different
contract term. The classic example is a change in market price. If a buyer in a
requirements contract suddenly experiences a large drop in ‘requirements’ after
the market price has fallen below the contract price, or a large increase in
requirements after the market price has risen above the contract price, the court
92 Implied Terms and Interpretation in Contract Law 4400

should suspect opportunism or, in legal terms, a violation of the implied

obligation of good faith. On the other hand, whereas a change in market price
suggests opportunism, a change in economic circumstances either not
contemplated by the contract or whose risk the contract places on the party
seeking strict enforcement, suggests a lack of opportunism. To return to the
requirements contract example, if the buyer’s requirements decrease or increase
because of a change in costs or technology subsequent to the contract, the
buyer’s behavior is likely not opportunistic (is in good faith) because the very
purpose of the requirements contract is to assign some risk of variation in the
buyer’s needs to the seller.
Another example of objectively verifiable circumstances on which courts
can focus is ex post transaction costs. If the market for substitute performance
is thick, opportunism is less likely (Goetz and Scott, 1983). Opportunism can
occur only when it is costly to switch to a new contracting partner, that is, when
at least one party has made sunk, specific investments. Although this test may
be useful in establishing general presumptions, it is of limited help in deciding
specific cases. Litigated cases tend to be precisely those in which ex post
transaction costs are likely to be high; otherwise, the cases would be settled.
Although opportunism is often discussed as an ex post problem,
opportunism can occur ex ante as well. For example, under a strict parol
evidence rule, a party might intentionally make oral statements that the other
party understands and relies on as part of the contract, then leave the provision
out of (or put a contradictory provision in) the writing. One common situation
is where a party tells the other to ignore the terms on the back of the first
party’s forms, then later tries to enforce those terms. On the other hand, under
a more flexible parol evidence rule, a party might intentionally ‘pad’ the
negotiation record with statements that party knows will be rejected by the
other party both orally and in writing, in the hopes that the first party can later
convince the court that these statements were in fact part of the contract (a
common practice in legislative history) (Eric Posner, 1998, pp. 564-565). This
latter form of opportunism helps explain why courts tend to be much more
skeptical of evidence that the parties can easily manipulate - especially prior
negotiations - than evidence over which the parties have less control -
especially common usages. It may also explain the motivation behind the use
of merger clauses as well as one reason why they should not be interpreted too
broadly. It is difficult for a party to predict in advance which negotiation tidbit
the other side might seize on later (Eric Posner, 1998, p. 572), so it is necessary
to write a broad clause that excludes them all. The same is not true for less
manipulable evidence, but it might be difficult to specify all such evidence in
writing in advance, especially in a single ‘anti-merger’ clause.
It is important to recognize once again that the opportunism approach is
dependent on determining contractual intent, which is often uncertain. Stating
that courts do and should deter opportunism does not by itself explain how
4400 Implied Terms and Interpretation in Contract Law 93

courts do and should resolve the question of how to determine contractual

intent; it simply opens the question up. Professor Muris, who first articulated
the opportunism approach to good faith, recognized that to apply the approach
courts need to consider ‘risk allocation’, which is a question of ‘interpretation’
that is ‘analytically prior to [the question] of opportunism’ (Muris, 1981, pp.
561-562, n.110). Nevertheless the opportunism approach may have something
to say about how courts should go about determining intent. First, courts should
hesitate to interpret a contract in such a way as to permit conduct that would
ordinarily be understood as opportunistic. Second, courts should hesitate to
attribute to contracting parties an intention not to have courts police against
opportunistic behavior (compare Muris, 1981, p. 573, n.138). Because
contextualism and textualism are both useful for deterring different types of
opportunism, we should therefore expect - and we find - that courts are never
completely committed to one or the other.

7. The Problem of Joint Fault or Multiple Contingencies

In many contractual disputes, there are often precautionary steps that both
parties could have taken to have avoided or mitigated the contractual loss. We
have already considered one such precaution - drafting a better contract. Quite
separate from the costs of drafting better terms are the costs of reducing the
likelihood of, or harm from, some risk ex ante, and of mitigating losses ex post.
Parties seeking to have the court imply or interpret a term in their favor may
be attempting to avoid a risk that the contract assigned to them or to extricate
themselves from a vulnerable position of their own making, which they could
have avoided at low cost.
In these cases, courts may have to make judgments about the relative fault
of both parties to decide whose behavior it is more important to deter in a
particular case. In particular, if one party is the least cost avoider of some
contingency while the other party regrets the contract for other reasons and is
opportunistically seeking to avoid its obligations, courts face a
‘negligence-opportunism tradeoff’ (Cohen, 1992, pp. 983-990). To take a
classic example, suppose a builder promises to use a particular brand of pipe
in building a house but inadvertently substitutes a different, but functionally
equivalent brand, a fact not discovered by the owner until the house is nearly
completed. The owner refuses to make the final payment on the house. The
court must choose between placing liability on the negligent builder or the
potentially opportunistic owner. There is an economic case to be made that
opportunism - if sufficiently proved - is more costly behavior and deterrence of
that behavior should take priority (Cohen, 1992). On the other hand, the more
likely it is that the builder ‘built first and asked questions later’ (Goldberg,
94 Implied Terms and Interpretation in Contract Law 4400

1985, p. 71), the more willing courts should be to find for the owner by
implying a condition.
To take another example of the negligence-opportunism tradeoff, suppose
that a buyer rejects goods delivered late after a market price drop and the seller
sues. There are two contingencies here: the price drop and the late delivery.
The contract assigns the risk of the price drop to the buyer and the late delivery
to the seller. Textualism will not resolve this dispute: either the price term or
the time of delivery term cannot be read absolutely. It is not sufficient to say
that only the seller has breached, because what constitutes a breach and the
consequences of that breach are precisely what is at issue. Nor can it be said
that only the seller could take precautions here because neither party could do
anything about the price drop and the buyer did not cause the delay in delivery.
If the buyer’s rejection is viewed as opportunistic behavior, then refraining
from such behavior could be viewed as a ‘precaution’. Depending on the
circumstances, there is an economic argument to be made for implying a good
faith ‘limitation’ on the buyer’s ability to escape its obligations.

8. Court Error

One of the main criticisms of courts’ taking too contextualist an approach to

interpreting and implying contractual terms is the problem of court error and
incompetence. At one extreme, if courts make no errors in importing
contextualist evidence, then such evidence should always be allowed, at least
if the cost of producing such evidence is not too high. At the other extreme, if
courts make too many mistakes in interpreting or implying terms, then
textualism becomes superior if the transaction costs of contracting are lower
than the expected savings resulting from fewer court errors (Eric Posner, 1998,
pp. 542-544). If courts make the methodological error of choosing
contextualism in situations of high court error, then the parties will respond by
attempting to contract around the court’s rules through detailed language or
broad merger clauses, by avoiding courts (for example, arbitration) or contracts
(for example, vertical integration), or by engaging in inefficient contractual
behavior to adjust to the court’s erroneous legal standard.
But the problem of court error does not necessarily favor textualism. In the
first place, as Hadfield (1994) has argued, the feared inefficient responses to
court error may not occur. Developing a formal model of good faith clauses in
intentionally incomplete contracts in the presence of probabilistic court error,
Hadfield concludes that the possibility of court error does not always caution
against court intervention. If courts are of such low competence that the parties
cannot reduce their marginal liability by improving their contractual efforts in
a cost-justified way (that is, liability is essentially strict), then the parties will
not change their behavior under the contract and will adjust to the anticipated
4400 Implied Terms and Interpretation in Contract Law 95

court error by adjusting the price of the contract rather than by declining to
contract. On the other hand, if courts are of higher, but still limited,
competence, then enforcement of good faith clauses may lead to greater joint
profits for the parties than nonenforcement. This will occur if the court error
does not have too severe an adverse effect on the parties’ incentives, and if the
private mechanisms for inducing optimal effort without court enforcement are
relatively weak.
In addition, Hadfield argues that courts of low competence should not
follow bright line rules or precedent, but instead should use standards. By
bright line rules she means rules requiring a certain level of conduct that is
independent of changing economic conditions; for example, a bright line rule
might say to a supplier in an output contract that to act in good faith it cannot
reduce its output to zero unless continued production puts the firm on the verge
of bankruptcy. By standards she means required actions that vary depending on
the economic circumstances, such as a rule that says an agent subject to a best
efforts clause must adopt reasonable sales methods. Bright line rules thus
correspond to textualism, whereas standards correspond to contextualism.
Bright line rules may compound rather than ameliorate court error by a court
of limited competence, because a bright line rule setting forth a required action
will so often be ‘wrong’. Thus, parties will respond to a bright line rule either
by ignoring it or by conforming their behavior to the inefficient safe harbor
established by the rule. Standards, by contrast, are more likely to encompass the
‘efficient’ response because courts using standards will set the minimum
required action low and set the safe harbor high. Thus, contracting parties are
likely to realize that their marginal liability can be reduced through increases
in cooperative effort (because courts are likely to notice and take those efforts
into account), and so the parties will be encouraged to take steps in the
direction of optimal behavior. The point is that the presence of court error does
not preclude the desirability of court flexibility.
A similar argument might apply even outside the relational contract
context. The argument for textualism here is that if transaction costs are low,
court error will be minimized because the parties will be encouraged to put
more terms in the writing. Textualist courts will interpret this writing more
accurately than contextualist courts, which will sometimes erroneously rely on
contextual evidence in addition to the writing (Eric Posner, 1998, pp. 545-546).
The argument assumes that transaction costs include, as has been suggested
above, not merely the cost of drafting, but the cost of drafting in such a way that
courts make fewer interpretive mistakes. But low drafting costs may not be
sufficient to ensure that court error is reduced under textualism. If, for example,
drafting costs decrease (as they probably have due to technological progress) so
that it is relatively easy for parties to add more terms to their writings, court
error could in fact increase if more detailed contracts are more likely to have
conflicting terms or courts are more likely to misinterpret a term to cover a
96 Implied Terms and Interpretation in Contract Law 4400

particular contingency the parties did not intend to cover.

Another aspect of court error that some argue supports textualism is error
in interpretive methodology, namely the choice between textualism and
contextualism itself. The contracting parties may prefer textualism and express
that preference through, for example, merger clauses. But if courts make errors
in determining the parties’ intentions generally, they will also err in
determining the parties’ methodological preference. Courts may therefore
choose contextualism too often (Eric Posner, 1998, pp. 547-548, 570-571). But
once again, this conclusion depends on the assumption that if courts use
textualism (this time to decide the parties’ methodological preference) they will
err less often because the costs to the parties of accurately expressing their
methodological intentions are low. One would think, however, that the costs to
the parties of drafting a particularized methodological term are quite high.
Methodological preference is only a second-order concern for the parties. It is
difficult for the parties to predict how court error will likely impact the wide
variety of possible disputes they might have, and methodological preference
terms have no contractual use to the parties outside of litigation. As a result, it
is not obvious a priori that choosing a textualist approach minimizes court
error.
Suppose, for example, that the parties generally prefer a textualist approach
and expect interpretation x of some term. There are actually three ways the
court could err. The court could take a contextual approach but reach
interpretation x. Or the court could take a textual approach and reach
interpretation y. Or the court could take a contextual approach and reach
interpretation y. Although the parties prefer the textualist approach, it might
be more important to them that the court gets the term right, however the court
does it. If courts are more likely to choose the desired interpretation x using a
contextual approach and interpretation y using a textual approach - either
because the parties underestimate the courts’ competence with respect to that
term or because their expressed preference for textualism inaccurately conveys
the parties’ correct estimate of the courts’ competence in this instance - then
error costs could be reduced if the court ‘mistakenly’ used a contextual
approach.
To give a simple numerical example, suppose the court can choose either
a textualist or contextualist methodology. If it chooses textualism, the
likelihood of interpreting the term the way the parties want is 0.4; if it chooses
contextualism, the likelihood of interpreting the term the way the parties want
is 0.6. Suppose further that ex ante the parties would value the court’s using
textualism and choosing x at 100; would value the court’s using contextualism
and choosing x at 80; would value the court’s using textualism and choosing
y at 50; and would value the court’s using contextualism and choosing y at 10.
Thus, the parties prefer textualism to contextualism, but prefer the right
outcome more. The expected value if the court uses a textualist approach is (0.4
@ 100) + (0.6 @ 50) = 40 + 30 = 70. The expected value if the court uses a
4400 Implied Terms and Interpretation in Contract Law 97

contextualist approach is (0.6 @ 80) + (0.4 @ 10) = 48 + 40 = 88 > 70.

The point is that the possibility of court error does not always argue in favor
of textualism. Both textualist and contextualist methodologies lead to court
error. The real question is which methodology has the lowest error rate and at
what cost. It is hard to answer this question in the abstract. This may help to
explain why courts do not - and never will - use pure interpretive
methodologies, but tend to switch back and forth depending on the
circumstances.

9. Summary and Future Research

To a large degree, the economic approach to interpretation and applied terms

parallels the approach in other areas of contract law. Court intervention is most
justifiable when transaction costs are high and the likelihood of court error is
low. Transaction costs include not only the ex ante costs of drafting in such a
way as to reduce court error, but the ex post costs associated with sunk specific
investments that make possible opportunistic behavior, as well as the costs of
alternative governance institutions such as extralegal sanctions. Most of the
economic arguments that suggest a restrictive court approach to interpretation
and implied terms have counterarguments. Therefore the institutional and
contractual context matters greatly in deciding what approach
efficiency-minded courts should take. The literature to date has mapped out the
broad contours. Future work will have to do the hard digging. That means
paying more attention to why people write the contracts they do and the
circumstances that motivate nonperformance.

Bibliography on Implied Terms and Interpretation in Contract Law (4400)

Al-Najjar, Nabil I. (1995), ‘Incomplete Contracts and the Governance of Contractual Relationships’,
85 American Economic Review Papers and Proceedings, 432-436.
Barnes, David W. and Stout, Lynn A. (1992), The Economics of Contract Law, St Paul, MN, West
Publishing Co.
Burton, Steven J. (1980), ‘Breach of Contract and the Common Law Duty to Perform in Good Faith’,
94 Harvard Law Review, 369-403.
Burton, Steven J. (1981), ‘Good Faith Performance of a Contract within Article 2 of the Uniform
Commercial Code’, 67 Iowa Law Review, 1-30.
Cohen, George M. (1992), ‘The Negligence-Opportunism Tradeoff in Contract Law’, 20 Hofstra Law
Review, 941-1016.
Cooter, Robert D. and Freedman, Bradley J. (1991a), ‘The Fiduciary Relationship: Its Economic
Character and Legal Consequences’, 66 New York University Law Review, 1045-1075. Reprinted
in Pardolesi, Roberto and Van den Bergh, Roger (eds) (1990), Law and Economics, Some Further
Insights: 7th European Law and Economics Association Conference, Rome, Sept. 3-5, 17-50.
98 Implied Terms and Interpretation in Contract Law 4400

Cooter, Robert D. and Freedman, Bradley J. (1991b), ‘An Economic Model of the Fiduciary’s Duty
of Loyalty’, 10 Tel Aviv Studies in Law, 297 ff.
Easterbrook, Frank H. and Fischel, Daniel R. (1993), ‘Contract and Fiduciary Duty’, 36 Journal of
Law and Economics, 425-446.
Gergen, Mark P. (1995), ‘A Defense of Judicial Reconstruction of Contracts’, 71 Indiana Law
Journal, 45-99.
Gillette, Clayton P. (1981), ‘Limitations on the Obligation of Good Faith’, 1981 Duke Law Journal
, 619-665.
Goetz, Charles J. and Scott, Robert E. (1983), ‘The Mitigation Principle: Toward a General Theory of
Contractual Obligation’, 69 Virginia Law Review, 967-1024.
Goetz, Charles J. and Scott, Robert E. (1985), ‘The Limits of Expanded Choice: An Analysis of the
Interactions between Express and Implied Contract Terms’, 73 California Law Review, 261-322.
Goldberg, Victor P. (1985), ‘Relational Exchange, Contract Law, and the Boomer Problem’, 141
Journal of Institutional and Theoretical Economics, 570-575. Reprinted in Goldberg, Victor P.
(ed.) (1989), Readings in the Economics of Contract Law, Cambridge, Cambridge University
Press, 67-71, 126-127.
Graham, Daniel A. and Peirce, Ellen R. (1989), ‘Contract Modification: An Economic Analysis of the
Hold-Up Game’, 52(1) Law and Contemporary Problems, 9-32.
Hadfield, Gillian K. (1992), ‘Incomplete Contracts and Statutes’, 12 International Review of Law and
Economics, 257-259 .
Hadfield, Gillian K. (1994), ‘Judicial Competence and the Interpretation of Incomplete Contracts’, 23
Journal of Legal Studies, 159-184.
Hart, Oliver D. and Moore, John (1988), ‘Incomplete Contracts and Renegotiation’, 56 Econometrica,
755-785.
Hansmann, Henry and Kraakman, Reinier (1992), ‘Hands Tying Contracts: Book Publishing, Venture
Capital Financing, and Secured Debt’, 8 Journal of Law, Economics and Organization, 628-655.
Hermalin, Benjamin and Katz, Michael L. (1993), ‘Judicial Modification of Contracts Between
Sophisticated Parties: A More Complete View of Incomplete Contracts and Their Breach’, 9
Journal of Law, Economics and Organization, 230-255.
Kahan, Marcel (1994), ‘The Qualified Case Against Mandatory Terms in Bonds’, 89 Northwestern
University Law Review, 565 ff.
Kahn, Charles and Huberman, Gur (1989), ‘Default, Foreclosure, and Strategic Renegotiation’,52 Law
and Contemporary Problems, 49-61.
Muris, Timothy J. (1981), ‘Opportunistic Behavior and the Law of Contracts’, 65 Minnesota Law
Review, 521-590.
Narasimhan, Subha (1986), ‘Of Expectations, Incomplete Contracting, and the Bargain Principle’, 74
California Law Review, 1123-1202.
Posner, Eric (1995), ‘Contract Law in the Welfare State: A Defense of the Unconscionability Doctrine,
Usury Laws, and Related Limitations on Freedom to Contract’, 24 Journal of Legal Studies,
283-319.
Posner, Eric (1998), ‘The Parol Evidence Rule, the Plain Meaning Rule, and the Principles of
Contractual Interpretation’, 146 University of Pennsylvania Law Review, 533-577.
Snyderman, Mark (1988), ‘What’s So Good About Good Faith? The Good Faith Performance
Obligation in Commercial Lending’, 55 University of Chicago Law Review, 1335-1370.
4400 Implied Terms and Interpretation in Contract Law 99

Verkerke, J. Hoult (1995), ‘An Empirical Perspective on Indefinite Term Contracts: Resolving the Just
Cause Debate’, 1995 Wisconsin Law Review, 837-918.
Warren, Elizabeth (1981), ‘Trade Usage and Parties in the Trade: An Economic Rationale for an
Inflexible Rule’, 42 University of Pittsburgh Law Review, 515-582.
Williamson, Oliver E. (1985), ‘Assessing Contract’, 1 Journal of Law, Economics and Organization,
177-208.

Other References
Ayres, Ian and Gertner, Robert (1989), ‘Filling Gaps in Incomplete Contracts: An Economic Theory
of Default Rules’, 99 Yale Law Journal, 87-130.
Charny, David (1991), ‘Hypothetical Bargains: The Normative Structure of Contract Interpretation’,
89 Michigan Law Review, 1815-1879.
Goetz, Charles J. and Scott, Robert E. (1981), ‘Principles of Relational Contracts’, 67 Virginia Law
Review, 1089-1150.
Posner, Richard A. (1998), Economic Analysis of Law, Boston, MA, Little, Brown and Co.
Wonnell, Christopher T. (1986), ‘Contract Law and the Austrian School of Economics’, 54 Fordham
Law Review, 507-543.